Time to Reform Ohio's Municipal Income Tax System

Apr 30, 2014

After a Great Recession that cost Ohio more private-sector jobs than any state except Michigan, Gov. John Kasich and state lawmakers understandably want Ohio “open for business.”

But is a state really open for business when its local governments require some businesses to file not one, not two, but between 30 and 40 W-2 tax forms for their employees? Or how about a state with local governments collecting income taxes on as little as $5 earned? Or a state with more than 15,000 pages of local ordinances defining hundreds of different local taxes? . . .

And so, businesses have fled and our economy has languished as Ohio’s byzantine municipal income-tax system continues to impose these and other hidden costs that have plagued development and economic growth for decades. Even the nonpartisan Tax Foundation recently found that ours is “ the most complicated, absurd and punitive system of municipal taxation in the nation” — a system that will tax you twice if you live in one municipality but work in another, compounding the injustice with every paycheck . . .

Their solution:

The Buckeye Institute and the Tax Foundation have suggested the following steps that Ohio could take to help re-open its doors for business: eliminate double taxation on pass-through entities; cap municipal tax rates; set reasonable thresholds that prevent filings for ridiculously low tax bills; implement uniform tax rules, forms and instructions across jurisdictions; set uniform rules for calculating tax credits; provide a meaningful “net operating loss carry-forward” so that new or struggling business can survive; and give a simple bright-line test for determining municipal residency.

Mr. Lawson is right to be very concerned about how Ohio's municipal individual income tax system is hampering economic competitiveness. As shown in the first chart below (generated from our unique Tax Burden App), Ohio is not only one of thirteen states that have a local individual income tax, but Ohio has the second highest tax burden in the country at 1 percent of personal income.

More troubling, the local individual income tax burden has been growing steadily since its inception in Fiscal Year (FY) 1957. As shown in the second chart below, between FY 1957 and 2011, Ohio's tax burden grew by 264 percent to 1 percent of personal income from 0.27 percent. In FY 2011, the local individual income tax burden increases the total state and local individual income tax burden by 50 percent!

Eliminating the local individual income tax entirely would significantly reduce Ohio's state and local individual income tax ranking relative to the other states. Currently Ohio has the 10th highest ranking in the country, but without the local individual income tax would slide 22 spots to only being the 32nd highest tax burden. Clearly it is time to reform or, ideally, eliminate the Ohio's municipal individual income tax system.

J. Scott Moody

Scott has nearly 20 years of experience as a public policy economist. He is the author, co-author and editor of over 180 studies and books. His professional experience also includes positions at the American Conservative Union Foundation, Granite Institute, Federalism In Action, Maine Heritage Policy Center, Tax Foundation, and Heritage Foundation.